Author: Ivanhoff

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The best risk-to-reward trading entries in a bull market occur right after a 3-5% pullback. We just had one.  The problem is that some 3-5% pullbacks turn into 10-20% corrections or into choppy sideways ranges, where only the most nimble active traders make money. This is what makes trading so challenging. The best returns usually exist when there are the most uncertainty and perceived risk.

How do we separate the pullbacks that are amazing buying opportunities from the pullbacks that could be the beginning of a lot more volatility and downside momentum? It is easier said than done.

I use the price action in momentum stocks and the market reaction to earnings. The results there are currently mixed. From one side, we saw some major breakdowns in TTD and UBNT. From another, many tech momentum stocks are showing notable relative strength by going sideways or breaking out: COUP, ROKU, TWLO, TEAM, etc.

It’s impressive how dip buyers managed to keep the S&P 500, the Nasdaq 100 and Russell 2000 above their 50-day moving averages despite the U.S. raising tariffs on China imports. Not selling off on bad news is typically how corrections end.

I lean on the bullish side but I fully understand that until SPY reclaims 290, the indexes and therefore many stocks are vulnerable; therefore, trading less and with a smaller position size continues to look like the most common-sense approach.

You understand the paradox, right. If we wait until SPY goes firmly above 290, we will miss some juicy opportunities. If we don’t, we risk getting chopped. The solution is to pick our spots and not to be constantly aggressive in the market. No one can capture all moves consistently.

Check out my last two trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

All charts in this post are powered by MarketSmith

Buying dips in a bull market is a high reward – low-risk setup. The challenge is that it is not as easy as it seems when you look at past charts.

Here are the four typical stages of a bull market pullback (shakeout):

Stage 1: The indexes close at new all-time highs after a few up days in a row. Everyone is buying breakouts and chasing stocks. Making money seems easy. The fear of missing out defines people’s decision making.

Stage 2: Quick and unexpected pullback. Those who bought at the highs are now underwater. We are starting to see an increasing number of failed breakouts. The sentiment is sobering up but it is still mostly bullish. There are three distinct groups of active market participants here – Group A – those who are quickly taking loses; Group B – they are buying the slight dip; and Group C – those who wait for a more significant pullback to enter.

Stage 3: The dip gets deeper. The sentiment is starting to turn bearish. There is no trace of the fear of missing out. Volatility is rising. Headlines are predominantly negative.

Group A (those who quickly cut losses in Stage 2) are starting to think about shorting stocks.

Group B (those who bought the slight dip in Stage 2) are cutting losses, complaining about how choppy the market is and are going to a mostly cash position.

Group C (those who were waiting for a bigger pullback) are now scared and don’t want to buy the dip anymore.

Stage 4: Many stocks are down to levels of potential support or are starting to recover after false breakdowns.

Group A (those who started to short in stage 3) are now underwater and starting to cut losses. Overwhelmed by the recent choppiness in their account, they have lost confidence and are not thinking about buying stocks yet despite seeing some positive developments in price action.

Group B (those who went mostly in cash in stage 3) – the majority of them still don’t trust the market but some are dipping toes in the water with small positions and seeing positive results.

Group C (those who initially waiting for a bigger pullback but got scared when it came) are still suspicious of the market activity. Most don’t do anything. Some open small starter positions.

Stage 4 is typically the environment which offers the best trading opportunities from a risk-to-reward perspective. After stage 4, there’s Stage 1 again, where everyone feels that it is safe to go back in the market and making money is easy.

This four-stage cycle repeats multiple times in a general market uptrend and it is the reason why many active traders struggle in a bull market.

Check out my two best trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.

All charts in this post are powered by MarketSmith

Sell in May and go away or stay for new all-time highs? Last week finished with fireworks and multiple breakouts. This week starts with another trade war induced decline.

No trend can last without pullbacks which often come when complacency reigns supreme and the giddiness is at all-time highs. Dip buyers have been dominating the tape for most of 2019. This probably won’t change any time soon.

In this week’s Momentum Monday we cover the price action in AMZN, AAPL, FB, and TWTR, which are outperforming in a mixed tape. We highlighted the comeback in financials and the a few setups in software, semiconductors and biotech.

Check out my two best trading books:

Swing Trading with options – How to Trade Big Trends for Big Profits

Top 10 Trading Setups – How to find them, hot to trade them, hot to make money with them.